Cambodian bonds: high-risk, high-yield

Government stands to profit from Thailand’s approval to sell unrated sovereign bonds from the Kingdom

As Thailand moves closer to offering Cambodian bonds on its local markets, experts are confident the fixed-income securities may prove to be an attractive product for frontier-market investors and enable the Kingdom to reach a new level of economic maturity.

On October 20, the Thailand Finance Ministry announced that it had approved Cambodia, Vietnam and Myanmar to raise capital through the issue of sovereign bonds on that country’s financial markets. In January 2013 the Thai government announced changes in regulations to allow unrated sovereign bonds to be offered on their markets.

“ [Cambodia] is rich in resources that are still left to be explored, so there’s a potential of income,” said Adisorn Singhsacha, managing director of Twin Pine Consulting, the Thai financial advisory firm working with Cambodia’s government to finalise a public offering.

“And the integration of ASEAN will make the market a lot bigger and the region a lot more interesting.”

While no release date has yet been set, Adisorn said there’s a high possibility that Cambodian bonds, which will be issued in Thai baht denominations and are likely to be unrated by any credit ratings agency, will become a reality in the near future. The news comes after the Lao government, in May last year, issued $50 million worth of three-year maturity bonds at a yield rate of 4.5 per cent. Two more subsequent instalments of 3 billion baht ($92 million) and 4.5 billion baht ($140 million) have since been issued.

Cambodia’s government stands to profit from the no-strings-attached bond issuance, according to Adisorn. He said the move could significantly reduce Cambodia’s reliance on donors such as the World Bank, the Asian Development Bank (ADB) and other sources of official development assistance, which largely come with strict terms dictating how the money is to be used.

“Once the government launches a sovereign bond, they can indicate the guidelines that are to be used to finance the budget – everything is possible,” he said, adding that the only downside is that market-driven bond interest rates are steeper than those from foreign aid loans.

The Cambodian government received more than $1.06 billion of financing from foreign funding during 2013, up almost 10 per cent from $972 million in 2012, according to the last year’s consolidated budget statements. The consolidated financial records, which were released on May 8, show Cambodia’s deficit as standing at $272 million.

Adisorn added that the issuance of Cambodian sovereign bonds could set a future benchmark for the Kingdom’s overall economic health and act as a gauge for future investment.

“If the government leads the way, the government paves the way for corporations, state owned enterprises or joint public-private partnerships to enter the bond market,” he said.

Jayant Menon, senior economist for the ADB, said a Cambodian sovereign bond issuance would have to come with a high yield – higher interest rates – to entice investors into buying sovereign debt from an untested frontier market’s government.

“I wouldn’t put a figure on it, but because of the inherent risk it would have to be a significant premium,” he said.

ADB loans to Cambodia as at December 31, 2013, totalled more than $1.9 billion.

International ratings agency Standard and Poor’s non-rated municipal bond index on October 29 showed the average maturity of the unrated bond market sat at 19 years, with an average yield at 5.95 per cent.

Menon added that a riel-denominated bond would be a “very welcome development” in reducing Cambodia’s dependence on the dollar. In the meantime, however, he said the Thai baht-denomination bonds will serve as an important stepping stone in the Kingdom’s economic development.

“Borrowing now to invest in the future, it is a necessary risk to address many development challenges to alleviate poverty,” he said.

Grant Knuckey, chief executive of ANZ Royal Bank, similarly expressed confidence in such a fixed-income debt issuance by the Cambodian government, saying market demand for high-risk, high-yield sovereign bonds, especially in Thailand, is substantial enough to justify such a move.

“[Laos] has had a number of relatively small issues over the past 12 months and has certainly not had any trouble in getting any of that away,” he said, referring to the bond releases that began in May last year.

“And Cambodia’s looking like an improving track, with pretty strong growth from a revenue mobilisation point of view in the past two or three years.”

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